Sept. 25 (Bloomberg) -- Luxury-goods makers early into
China have long counted on consumers there to snap up $1,000
handbags and other pricey -- and profitable -- wares. Now,
Chinese tastes are changing in ways that may hurt the brands
that expanded most aggressively in the country.

As more Louis Vuitton bags, Gucci wallets, and Omega
watches flood cities like Beijing and Shanghai, consumers are
eschewing readily available logoed products in favor of more
distinctive alternatives.

“As the luxury industry matures, the Chinese are becoming
much more sophisticated about the products that they buy,” said
Fflur Roberts, global head of luxury goods research at
Euromonitor in London. “It’s not just about the bling aspect.”

The shift to less conspicuous and often more expensive
goods, which happened in Europe and the U.S. after the 2008
collapse of Lehman Brothers Holdings Inc., may dent growth at
Vuitton and Gucci, which until recently sold more than half the
luxury handbags in the world’s second-largest economy, HSBC
estimates.

Same-store sales at niche luxury brands such as Bottega
Veneta and Yves Saint Laurent, owned by Paris-based PPR SA, are
set to increase almost three times this year’s industry average
even as weakening economic growth takes its toll on demand,
according to HSBC. Cheaper bagmakers such as New York-based
Coach Inc. may also benefit as increasingly demanding consumers
seek value for money, the brokerage predicts.

Still Spending

“Consumers are still spending in China but they’re
spending differently,” said Uché Okonkwo, executive director of
Paris consultant Luxe Corp. As Chinese shoppers become better
informed about trends, “luxury companies have to work harder to
sell to them than they did five years ago. It’s a question of
balance.”

China’s gross domestic product expanded 7.6 percent in the
second quarter from a year earlier, the smallest gain in three
years and the sixth quarterly slowdown. China is the world’s
fifth-biggest luxury market, accounting for 92 billion yuan
($14.6 billion) of sales in 2011, according to Euromonitor.

Recent sales reports suggest the strategy isn’t working.
Burberry said same-store sales have fallen since the end of
August, adding that Chinese tourists may be spending less on its
trenchcoats and other products on visits to Europe.

“We were the first to report a slowdown but we won’t be
the last,” Chief Executive Officer Angela Ahrendts said Sept.
17 after the British luxury goods maker’s 2013 spring/summer
fashion show in London.

At Gucci’s Sept. 19 fashion show in Milan, CEO Patrizio Di
Marco declined to comment on the company’s performance. PPR
reports third-quarter sales on Oct. 25. A spokesman for LVMH,
which also reports quarterly sales next month, declined to
comment on Vuitton sales. Chinese shoppers may account for more
than 25 percent of global luxury sales, HSBC estimates.

Logo Fatigue

Luxury sales have slowed in China as more consumers there
travel abroad and see that designer clothes and accessories can
cost half as much in European and American stores as they do at
home. And Ahrendts noted that the once-a-decade leadership
change in China has slowed sales for luxury brands as many
people hold back on gifts to public officials until it’s clear
who will retain power.

Prada, which uses more leather in its bag collections than
Vuitton and relies less on logos to differentiate its products,
may benefit as consumers seek alternatives to Vuitton and
others, according to HSBC. The Milan-based company said
yesterday that same-store sales haven’t slowed in the last two
months even as market conditions worsen.

Vuitton, Omega, and other “megabrands may start to show
signs of suffering brand weariness owing to their early entry
into several markets,” wrote Erwan Rambourg, an analyst at
HSBC. “We term this the ‘first-mover disadvantage’.”

LVMH shares were down 0.8 percent at 121.85 euros as of
11:22 a.m. in Paris trading, the third-biggest decliner on the
CAC 40 Index. PPR fell 0.3 percent in Paris to 121.65 euros,
while Burberry declined 0.4 percent in London. Hermes
International SCA gained 0.3 percent.

‘Banalization’

Vuitton has 39 boutiques in China, while Gucci has 54 and
Burberry has 66. Hermes, which last month raised its 2012 sales-growth target after first-half earnings beat estimates on Asian
demand, has 21 outlets in the country. Prada has about 20.

The so-called absolute luxury segment -- the priciest goods
-- where Hermes competes, is the fastest-growing part of the
market and will keep outperforming the rest until at least 2014,
Bain & Co. predicts.

Being too accessible can lead to “banalization,” Hermes
CEO Patrick Thomas warned Aug. 31 as the maker of silk scarves
and Birkin bags reported a 25 percent increase in first-half
sales in Asia. The Paris company, which doesn’t anticipate a
slowdown in second-half sales in China, plans to protect its
image by limiting store expansion, opening at most 20 shops
worldwide in the next five years, he said.

More Cautious

Burberry’s surprise warning made some analysts more
cautious about LVMH. Eva Quiroga of UBS downgraded the company
to neutral and cut her estimate for second-half sales growth at
its fashion and leather-goods unit. Revenue at the division,
LVMH’s largest and most profitable business, will climb 5
percent to 6 percent in the period, slowing from 10 percent in
the first six months of 2012, Quiroga estimates. LVMH’s total
revenue should rise 8.5 percent in 2012, Quiroga says, trailing
the European luxury goods sector’s average 9.2 percent growth.